Business Fund Investments: Expansion Strategies And Opportunities

Businesses often need to raise funds to expand into new markets or locations, invest in research and development, or stay competitive. While companies ideally aim to fund these projects through profits from ongoing operations, it is often more favourable to seek external investors or lenders. There are several ways to raise capital, including retained earnings, debt capital, and equity capital. Each of these methods has its own advantages and disadvantages, and businesses must carefully consider their options before deciding on a funding strategy.

Self-funding

There are several ways to get started with self-funding. The first is to check your bank statements to see how much cash you have in your accounts. You could also turn to friends and family for funding, either in the form of a loan or in exchange for equity. When using friends and family for funding, it is important to set clear expectations and maintain healthy boundaries to avoid tension in personal relationships. Additionally, be sure to consult a CPA to understand the tax implications of receiving money from friends and family.

Another option for self-funding is to use Rollovers for Business Start-ups (ROBS), which involves investing your retirement funds into your own business. This method is complex to set up and typically requires working with an experienced ROBS provider. However, it offers the advantage of not requiring monthly payments, which increases cash flow in the early stages of growing a business.

Bootstrapping, a core element of the American Dream, refers to using earned revenues to grow and expand a business. This method is preferred by many entrepreneurs as it leaves them in control of how and when they expand. Bootstrapping works well for businesses that can deliver services or meet production requirements at the early stages and then add more employees or expenses as their capacity diminishes. However, bootstrapping can be challenging as it requires going at it alone without financial support from investors.

Overall, self-funding offers business owners the benefit of complete control and ownership over their venture. However, it is important to carefully consider the risks and ensure that you do not spend more than you can afford, especially when tapping into retirement accounts early.

Venture capital from investors

Venture capital is a form of private equity financing provided by firms or funds to startup, early-stage, and emerging companies that have been deemed to have high growth potential. It is a way for new businesses to raise external capital and spread the risk of failure. Venture capital generally comes from investors, investment banks, and financial institutions.

Venture capitalists provide backing through financing, technological expertise, or managerial experience. They take on the risk of financing startups in the hopes that some of the companies they support will become successful. In exchange for the high risk that venture capitalists assume by investing in smaller and early-stage companies, they usually get significant control over company decisions, in addition to a significant portion of the companies' ownership.

Venture capital is particularly important for new businesses that do not have enough cash flow to take on debts. This arrangement can be mutually beneficial because businesses get the capital they need to bootstrap their operations, and investors gain equity in promising companies.

Venture capital is typically provided in several rounds of funding, including pre-seed, seed, early-stage, and growth capital. During the seed round, entrepreneurs seek investment from angel investors, venture capital firms, or other sources to finance the initial operations and development of their business idea. Seed funding is crucial for startups to kickstart their journey and attract further investment in subsequent funding rounds.

The first round of institutional venture capital to fund growth is called the Series A round. Venture capitalists provide this financing in the interest of generating a return through an eventual "exit" event, such as the company selling shares to the public for the first time in an initial public offering (IPO) or the disposal of shares through a merger or acquisition.

Venture capital is a way to construct an institution that systematically creates business networks for new firms and industries, helping them to progress and develop. This institution helps identify promising new firms and provides them with finance, technical expertise, mentoring, talent acquisition, strategic partnerships, and marketing "know-how".

However, it is important to note that accepting venture capital support can result in a loss of creative control for the business. Venture capital investors typically demand a large share of company equity and may make demands of the company's management. They are often seeking a fast, high-return payoff and may pressure the company for a quick exit.

Overall, venture capital from investors is a crucial source of funding for businesses looking to expand, particularly in the high-growth technology and life sciences or biotechnology fields. It provides the necessary capital for companies to invest in new projects and fuel their growth.

Small business loans

Types of Small Business Loans

There are several types of small business loans available, including:

• Term loans offer a lump sum of money that is repaid over a set time frame, typically ranging from $25,000 to $1 million for a period of one to ten years.
• Small Business Administration (SBA) loans are long-term, low-cost, government-backed loans ranging from $5,000 to $5 million. SBA loans have competitive rates and flexible repayment terms, but the application process can take up to 90 days.
• Equipment loans are designed specifically for purchasing equipment and can offer up to 100% financing. The equipment being purchased typically serves as collateral for the loan.
• Short-term business loans are similar to term loans but are repaid over a shorter period, usually a few months. They tend to have higher interest rates and are easier to qualify for.
• Business lines of credit provide a revolving source of capital, similar to a credit card. You only pay interest on the amount you draw, and they are typically used for short-term needs or to cover gaps in cash flow.
• Invoice factoring or financing allows you to borrow against the value of your outstanding invoices. You pay a factor fee, typically ranging from 0.5% to 5% per month of the invoice amount.
• Merchant cash advances are a type of short-term financing where you borrow against your business's future credit card receipts. You pay back the loan, plus a factor rate, as a percentage of your credit card sales.

Preparing for a Small Business Loan

When preparing to apply for a small business loan, it is important to have the following in order:

• An updated business plan
• Key financial statements such as a balance sheet, income statement, and cash flow statement
• A good credit score and credit history (both business and personal)
• Collateral or down payment, if required
• A strong business track record and positive customer reviews
• A clear idea of how you plan to use the loan funds and how it will impact your business

Finding the Right Lender

When considering a small business loan, it is important to compare multiple lenders and loan options to find the best fit for your needs. Factors to consider include interest rates, repayment terms, loan amounts, funding speed, and customer service. It is also important to read reviews from other small business owners who have used the lender.

Examples of Small Business Lenders

• Funding Circle offers term loans of up to $500,000 for expansion projects, with funds available in as little as two days. They have competitive rates and terms of up to seven years, but require a minimum credit score of 660 and at least two years in business.
• OnDeck offers short-term loans from $5,000 to $250,000, with repayment terms of up to 24 months. They accept borrowers with a minimum credit score of 625 and have a streamlined application process, but interest rates can be high compared to traditional lenders.
• Accion Opportunity Fund offers microloans ranging from $5,000 to $250,000, with low minimum credit score requirements and customized loan terms. They target their funding towards minority, women, and low-to-moderate-income entrepreneurs.
• JR Capital offers equipment loans of up to $10 million, with competitive rates and flexible repayment terms. Funding is available in as little as 48 hours, but they require a minimum credit score of 620 and typically at least two years in business.

Angel investors

However, one disadvantage of angel investors is that they typically want 10% to 50% of the company in exchange for funding, which can result in business owners losing control of their company. Additionally, angel investments bear extremely high risks and are subject to dilution from future investment rounds, so they require a very high return on investment. Business owners seeking funding from angel investors should be prepared to give up a portion of control and ownership and have an exit strategy in place to allow investors to pocket their profits.

Government grants

Federal Government Grants

The US Small Business Administration (SBA) provides grants to nonprofits, Resource Partners, and educational organizations to support entrepreneurship through counselling and training programs. While the SBA does not typically offer grants directly to small businesses, it does offer the Program for Investors in Microentrepreneurs (PRIME), which provides federal grants to microenterprise development organizations to assist disadvantaged microentrepreneurs.

The US Department of Agriculture (USDA) also offers grants to small businesses through the Rural Business Development Grant program, which supports small businesses in rural communities. To qualify, businesses must have fewer than 50 new employees, less than $1 million in gross revenue, and be located in an eligible rural area.

State and Local Government Grants

State and local governments also offer small business grants, often as part of economic development initiatives. For example, the State Trade Expansion Program (STEP) provides financial awards to state and territory governments to support businesses that want to export.

Additionally, the Economic Development Administration provides business grants, resources, and technical assistance to communities to support economic growth and encourage entrepreneurship and innovation.

Corporate Small-Business Grants

Some corporations and large companies also offer small-business grants as part of their philanthropic efforts. For example, the National Association for the Self-Employed offers monthly small-business grants worth up to $4,000 to its members, as well as an annual $3,000 college scholarship for members' dependents.

The Freed Fellowship is another example of a corporate small-business grant, offering a $500 microgrant to a small business owner each month, as well as a $2,500 end-of-year grant and other benefits.

How to Get a Small-Business Grant

Finding and applying for small-business grants can be a challenging and time-consuming process. Here are some steps to help you get started:

• Research and identify the right grants: Use specific keywords and search by location to narrow down your options.
• Prepare your grant applications: Make sure you meet all eligibility requirements and have the necessary paperwork.
• Submit and track your applications: Pay attention to deadlines and set up a system to monitor different grant timelines.
• Consider hiring a grant writer: Grant writers can provide expertise and help you manage the application process.

Frequently asked questions